Corporate Bonds

Archive for May, 2008

Question: Can somebody please help me with this problem?

Sachi has $28,000 to invest. Her financial planner suggests that she diversify her investment into three investment categories. Treasury bills that yield 3% simple interest annually, municipal bonds that yield 5% simple interest annually, and Corporate Bonds that yield 9% simple interest annually. Sachi would like to earn $1360 per year in income. In addition, Sachi wants her investment in Treasury bills to be $8000 more than her investment in Corporate Bonds. How much should Sachi invest in each investement category?

Answer: Treasury bills:
Principal = p
Rate = 0.03
Interest = 0.03p

Municipal bonds:
Principal = 28000 - [(p + (p - 8000)] = 36000 - 2p
Rate = 0.05
Interest = 1800 - 0.10p

Corporate bonds:
Principal = p - 8000
Rate = 0.09
Interest = 0.09p - 720

The sum of the three interest amounts needs to equal $1360.

(0.03p) + (1800 - 0.10p) + (0.09p - 720) = 1360

---> 0.03p + 1800 - 0.10p + 0.09p - 720 = 1360

---> 0.02p + 1080 = 1360

---> 0.02p = 280

---> p = $14,000

Sasha invested:

$14,000 in Treasury bills (p)
$8,000 in Municipal bonds (36000 - 2p)
$6,000 in Corporate Bonds (p - 8000)

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Holt: The prospects for Corporate Bonds